Commentary: Free markets aren't the problem

This article first appeared in the St. Louis Beacon: October 22, 2008 - The rollout of the government’s rescue plan offers new and disturbing insights to the future state of our economy. We are learning that the Treasury’s funding of banks is aimed as much at reshaping the industry as stabilizing it. A Treasury official told The New York Times, “One purpose of this plan is to drive consolidation.”

This move by the government to intercede in private industry should alarm us. The fact that it doesn’t reflects the increasingly popular belief that freely operating markets are a major factor explaining the events that triggered the dramatic economic downturn. Free market capitalism is under attack.

“Free market” does not mean absolutely no regulation from governmental authority. The government has a role: setting the rules of the game.

Such rules come in many guises. For example, laws establish and protect property rights. You enjoy the fruits of your labor. You have the right to do, within certain social parameters, what you wish with your property. These property rights are fundamental to exchange.

Nobel Prize-winning economist Milton Friedman once said, “The most important single central fact about a free market is that no exchange takes place unless both parties benefit.” It isn’t that free markets never experience disruptions. But history also shows that free markets are more likely to spread economic benefit than a more controlled economy.

China today is testimony to the benefits of free markets over government control. At the other extreme, sub-Saharan African nations are mired in abject poverty. William Easterly of New York University, a long-time advocate of improving African’s economic condition, has said that more money isn’t the solution. Even after $600 billion in aid, there has been little improvement in many African lives.

Those African nations have failed to raise their people out of poverty because markets are stifled. Extensive bureaucracies exist to dole out aid that is intercepted by corrupt government officials. Easterly suggests that “free enterprise has been the tried and true vehicle for escaping poverty everywhere else.” So, why is the U.S. taking this step backward?

Almost everyone will say that they like free markets except when times get tough. Then, we seek protection from economic calamity. This reflects David Brooks’ view that while most Americans believe they control their economic destiny, they also expect the government to provide a “background level of order” to their lives. The rules of the game, as it were.

Ronald Reagan’s view that “government is not the solution to the problem, government is the problem” has dimmed. Recent events stoke anti-free market sentiments.

But is more government really the answer?

Consider a short list of government responses.

The failure to coordinate government response to Hurricane Katrina is as much an indictment against the Bush administration as it is against relying on the bureaucracy to get it right.

The actions of Fannie and Freddie illustrate how quasi-governmental agencies, pressured by political motives to widen home ownership at all costs, made horrible decisions that led us to the current financial crisis.

Add to that, decisions by government officials to look the other way as financial whiz kids created new investment schemes that circumvented existing regulations.

Re-establishing trust in the financial market is the most important outcome of the Treasury and Fed actions. But the approach that is being taken will create huge moral hazard problems and, if Fannie and Freddie are guides, politicize the recovery process. Passing more control to government bureaucrats will not ensure future prosperity or tranquility.

Markets exist to solve distributional problems. History shows that more government intrusion not only encroaches on economic freedom but diminishes political freedom as well. “For all its flaws,” observes The Economist, free market capitalism “is the best economic system man has invented yet.”

Rik Hafer is distinguished research professor and chair of the Department of Economics and Finance and director of the Office of Economic Education and Business Research at Southern Illinois University Edwardsville.